Real estate investors know what they hate about being an investor is the liability of managing the properties they buy. Several investors across the United States sell their investment property due to increasing maintenance liabilities. As a property age, it requires maintenance regularly. This increases the property’s operating expenses, and the investor is left with no choice but to relinquish the property.
Undoubtedly, selling your investment property will bring you hard cash. However, it might not be the best thing for you as the amount you receive on your property’s sale will be taxed normally. But using a 1031 exchange, if you exchange your old property with a NNN or triple net property, you will be free from paying taxes on the transaction, and you won’t have to fulfill landlord responsibilities either. Before we delve into how you can acquire NNN properties for sale against your old property, let’s understand triple net leases more closely.
If you buy a net leased property, you won’t have to pay for your property’s operating expenses.
A triple net or NNN lease is a lease agreement that requires the tenant to pay all major operating expenses besides the base rent. NNN leases are single-tenant arrangements and may lock the tenant for 10-15 years. Different from a gross lease, a NNN lease requires tenants to pay all operating expenses along with the base rent. The operating expenses a tenant covers under a NNN lease includes insurance fee, property taxes, and maintenance cost. Be it NNN properties for sale in California or in any other state, the benefits are the same.
1031 Exchange and NNN Lease Investment – A Win-Win Situation for Investors
In case you’re wondering if it’s possible to mix NNN investment with a 1031 exchange or not? The answer is a Yes; it is very much possible. 1031 Exchange, as you may know, allows investors to defer capital gains tax on exchanging an investment property for another like-kind property. As mentioned, only investment properties qualify for a 1031 exchange, and you can’t exchange your primary residence using this tax-deferred exchange (in case you were wondering this too). Therefore, when a 1031 investor invests in NNN properties, they not only shelter their income from taxes but also get relief from property management for the rest of their life.
Let’s apply some math to see how a triple net investment is more beneficial than a gross lease.
Say, your current investment property worth $2 million, which you’ve leased out to a tenant for a monthly rent of $5K or $60K annually. Now, let’s calculate the operating expenses that you pay from your monthly income. Say, at the end of a year, you spent $2000 on repair, $1000 as property taxes, and another $1000 on the insurance. So, your profit after subtracting all expenses will be –
Rent = $60,000
Operating expenses = (Maintenance+Property Taxes+Insurance fee)
= $(2000+1000+1000) = $4000 or $4K
Profit = $(60K-4K)
So, you’re investing $4k per year from your income. In other words, you’re paying these expenses from your pocket.
Now, consider the same example under a NNN lease arrangement. As the tenant pays the operating expenses, you don’t need to spend anything from your income. Therefore, instead of earning $54K at the end of a year, you are getting $60K.
Here are some benefits you will receive after purchasing a net leased property –
- Freedom from property management is what you get as soon as you acquire a triple net property. From the first month, you start saving operating expenses, which otherwise you need to pay from your monthly income.
- No capital gains tax when you are doing a 1031 exchange. By investing your 1031 proceeds in a triple net property, you save up to 100% capital gains tax.
- You get big multi-national companies as tenants. Brands like CVS, McDonald’s, KFC, etc., look to rent net leased properties.
- It’s a great way to diversify your investment portfolio. Adding a net leased property in your collection can be a huge bonus.
How to locate net leased properties?
NNN lease properties are available throughout the country. However, locating such properties may not be that easy if you try to do it by yourself. The reason is simple – NNN properties are limited, and NNN investors are many. Even if you somehow manage to locate one such property, there is no guarantee it will fit your budget. That’s why you need assistance from professionals who know this investment inside-out. A NNN expert or your Qualified Intermediary can help you with this. In case you don’t know where to find a Qualified Intermediary, you can reach out to one of our impaneled NNN experts or 1031 exchange Qualified Intermediary for this.